Quote of the week:
‘Now that China is such an engine of global growth, it urgently needs to improve its economic data. Only a madman would drive a juggernaut at full speed with a faulty speedometer, a cracked rear-view mirror and a misty windscreen.’ – The Economist
Of course, The Economist is never really wrong, just not totally right this time. Just add USA after China in the above quote and voila - you have the Global Economy encapsulated in a short, pithy quote that you can use at your next dinner party to impress your future spouse with your intimate knowledge of high finance. I say add the US because the Fed stopped reporting some money supply data some time ago that was too embarrassing. China, on the other hand, is never embarrassed; and there you have two sides of the same coin.
Also, the Ittihad Weekly is now also available as a Blog at: http://www.ittihadsecurities.blogspot.com/ . You can add your comments directly onto the website, but I would be most pleased if you continue to write directly to me as well. We must not allow technology make me obsolete just yet.
Letter of the Week (Commentary will be back next week for sure IA):
Letter No. 1:
Mr. Jawad:
I hope I am not wasting your time, but I would like to reply to the individual who sent you the letter.
I am not a Muslim, nor am I a Canadian; I am an American, with a Bachelor's degree in Accounting, working on a JD. The reason I point that out is that my professors in undergraduate studies constantly tried to tell us all, "Change your thinking. Debt is not bad. Debt is good; debt is necessary."
As a rational person, I found this reasoning uncomfortable, after all, what is debt but selling tomorrow to indulge today? But with a grain of salt, I accepted that this was the way my world worked.
I started talking to one of your employees, Siddiq, many years ago, and he patiently explained the concept of Islamic Finance, something completely alien to the financial education I had been indoctrinated into. I still don't understand everything, but I do know one thing: My professors lied to me, debt IS bad.
I can illustrate that with frightening certainty. I'm in an American law school as we speak and I watch the evils of debt there every day. The average American law student graduates with more than $50,000 in student loans on top of the debt Americans find necessary to survive. This debt changes the very pattern of the lawyer's reasoning. Many can't afford to work helping low income families, or work for the government prosecuting criminals or defending the innocent. Instead, they flock to giant corporate law firms or start businesses trying to bleed money out of the innocent through personal injury lawsuits. Lawyers have a terrible reputation for being immoral, social parasites. But the irony of it is, it's not the nature of the people in the profession causing this-- IT'S THE DEBT!
Thanks to my exposure to your company and its ideas, I'm completely atypical for a law student. I have no student loans at all, and I just finished paying off and cancelling my last credit card. I still have a mortgage, but it will be the next to go, as quickly as I can get out from under it. That gives me the freedom to pursue the law in a moral way, defending the innocent and standing up for what is right. To me, that is a far greater luxury than a bigger house or steak on the table.
I love your newsletter, and reading it is the high point of my week. You really shouldn't call it "Islamic Finance," you should call it "Sane Finance," because the way we do business in the western world really is insane. It's not about religious ideas, it's about logic. A good idea is a good idea no matter its source.
I love your witty, intelligent cynicism. To me it is a sign that you truly care about Islamic Finance because you care more about its future than its present reputation. I also love having something to read that challenges my mind, something that I find quite rare.
Keep up the good work, I'll be waiting for the next issue, and I'll put down everything to read it, even though I'm studying for finals.
J Schneider
---
Response to Letter No. 1:
Dear Ms. Schneider,
Hope you are well. I am beyond merely thankful for your exceedingly generous and insightful email. One hardly knows where to begin, so I guess the beginning will have to do. Your letter is not a waste of my time - it actually speaks to the very reason for why we are given time in this life at all. I found your letter both inspiring and humbling - your idea and expression of how the freedom to pursue a moral end in life is a luxury beyond mere wealth, is intensely powerful. I pray that we will be able to learn from your example and apply this philosophy in our own lives.
While I am humbled and turn to water with embarrassment that you find both enjoyment and value in the ideas that we try and discuss, I am consoled by the fact that I am quite undeserving of this praise. I truly think that most of the ideas I regurgitate in my admittedly cute fashion are actually timeless truths that have survived the onslaught of both religion (in the narrow sense of the word) and Logic (even at its most expansive). In this sense, my contribution is miniscule compared to my responsibilities as a ‘financial-type’. I think it is much more accurate to say that it is the inherent elegance of the subject matter we call Islamic Finance that forces itself upon our minds and hearts with such clarity. This is despite, not because of, my feeble attempts at being convincing. Since we are on the subject of praise however, it is much better to recognize the contributions of Siddiq, who introduced (re-introduced?) you to the subject, and the rest of the team here that actually tries to develop solutions while I provide comic relief. Above all though, credit is due to our shareholders, who had the foresight to put their hard-earned savings into our company when we were just an idea that carried no guarantee of monetary success. It is truly their vision and their ‘walking the walk’ that allows us the luxury to speak about these issues today. Their original investment of time and money allows us to strive for a moral life even while working in Finance, which is a gift for which no amount of thanks or credit is adequate repayment.
Nevertheless, since I am unable to leave things well enough alone, I would like to expand on your letter and nitpick just a wee bit. Your example of how debt works its way into the lives of young lawyers and thus affects the development of Law is indeed a frightening and eye-opening example of how debt take us away from what we really want to be doing with our lives. Indeed, if we were only to ask ourselves whether we go to work in order to fulfill our human potential or to pay the mortgage, the results would probably be shameful.
Also, your tongue-in-cheek suggestion that we should start calling this ‘Sane Finance’ (a term that I think you should copyright ASAP) is gratifying, but ultimately a bit problematic. One problem is that my sanity is in such obvious short supply that my calling this type of finance ‘Sane’ will undermine its credibility, not add to it. The second and main reason I insist on not allowing the concept of sanity to take over from Islam though, is that in my opinion, there is something deeper at work here than either logic or sanity. The idea that usury is not a healthy use of money is contentious depending on which system of logic is being used so this is an argument that is somewhat unwinnable with an appeal to pure logic. At the end of the day, it really is about values such as economic justice and I do not think that the removal of the term ‘Islam’ from the conversation would be fair on that score. The fact of the matter is that even though as Muslims we have been no better than our brothers and sisters from other faiths (for whom usury was also forbidden) in our involvement with conventional finance, ‘Islam’ as a body of knowledge or as a source of inspiration still has not compromised on the issue of usury. This point bears careful repeating: ‘Islam’, as one of the bodies of knowledge and law in the world still has not compromised on the unacceptability of usury and is therefore one of the last conceptual / religious or faith-based challenges to its widespread institutionalization. Many Muslims (and many value-less institutions) are sadly trying to get around the rules, but the rules are still there, plain for all to see. Removing the word ‘Islam’ from the discussion would be a disservice to a Faith that has brought us to this point. It would also do harm to our ability to connect with groups such as the Christian Council for Monetary Justice on the basis of Faith. Also, even though Islam is an Abrahamic faith that is sort of taking a stand on this crucial issue, the fact is that this stand is somewhat tenuous these days. This should encourage us to keep both sanity and Islam within Islamic Finance, not disavow Islam as one of the most proximate sources of our moral logic. Finally, please rest assured that I do not say any of this with a sense of superiority or self-congratulation, but rather with a sense of tragedy. The road is long and in the grand scheme of things, we have only just begun to understand how our present debt-based system sells out all our tomorrows. I only wish that we were better at fulfilling the potential of economic justice that is plainly there in our faiths, not in a narrow, exclusionary sense, but as good people, for all people; regardless of source, as you say.
I thank you once again for your thoughtful, insightful and exceedingly generous letter and wish you the very best in a long, meaningful career that God-willing will remain unsullied by the ravages of both debt and compromise. I also wish you the best of success in your finals. Your letter and success with your debt situation inspires me personally and I know will resonate with and inspire other readers as well. Perhaps through such dialogue, we can all learn to make the connection between our astronomically high levels of debt and our equally unforgivable failure at fulfilling our responsibilities to one another and the Divine.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May (tomorrow). Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of ‘How to Raise Capital for Your Business’, so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO’s topic of discussion will be on the ‘Ethical Dimensions of Islamic Finance’ and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. The ROB collects some of the best financial blogs in one convenient place ... read more here
2. UBS declares yet another $10+B loss and cuts 5,500 jobs ... I wonder if all the Aunties that proudly tell me ‘My son is a banker!’ and ask me ‘why don’t you work for a bank?’ are quivering in their sandals at the thought of banking becoming less than fashionable ... read more here
3. The Economist makes a case for caution when thinking of investing green ... a very interesting (and short) read ... read more here
4. Best argument yet for letting women run the family finances ... research shows that is much more difficult to defraud women than it is to defraud men. Men, it seems, always getting caught up in the heat of the moment and investing / losing money based on emotions ... read more here
Economic News:
1. Rob Carrick wakes up and sees inflation ahead ... the timing of his columns would be comical if it wasn’t so tragic ... read more here
2. The Chairman of the FED has a plain-speaking style, but he seems to be making a career out of stating the obvious ... he thinks home foreclosures would hurt the economy, you think? ... read more here
3. It is not usual for the Ittihad Weekly Briefing to be ahead of The Economist but I think we managed it by two weeks this time on the subject of commodity prices and the falling dollar. Nevertheless, this is yet another excellent article from the good folks at my favourite source of economic analysis. It is just too bad that their political leanings are so totally messed up ... read more here
Islamic / Middle East / Emerging Markets:
1. This hardly made the news, but that is because in North America, we are fascinated by North America. A Bahraini fund investing in Eastern Europe? Does that mean Eastern Europe has peaked? ... read more here
Interesting but not all Finance:
1. What! Such a strong link between Finance and Warfare?! ... Including juicy news about the US political system? - and here we thought financial decisions were all politically-neutral, or was it that all political decisions were financially neutral? ... read more here
2. Albertan Oil Sand companies on trial for environmental damage ; a case that has riled up the public after the recent death of over 500 ducks as they landed on an open toxic pond. Perhaps one of you can find some meaning in the fact that China is having a similar problem at what was once one of its most beautiful lakes .
3. Wondering what our best and brightest political minds think about on Parliament Hill? No, not the economy. No, not the various wars we are involved in. No, not the First Nations colonial situation. No, not even the lack of a coherent trade policy with the BRIC countries. Think of something to do with toilets and plumbing .
4. One of the best short articles on communication I have ever read ... lays out core principles of communication (defined as the delivery and the receipt of the intended message) for those in business, but can be adapted for other circumstances ... read more here
Showing posts with label interest. Show all posts
Showing posts with label interest. Show all posts
Friday, May 9, 2008
Tuesday, May 6, 2008
Letters Edition #2
Quote of the week:
'The critic has to educate the public. The artist has to educate the critic.' - Oscar Wilde
Alas, I have been accused below of being a mere critic. I received a letter from someone at a company that that has an Islamic Finance 'window' in addition to their regular business. The person takes exception to the irreverent way in which I seem to be discussing 'Islamic Finance' and the companies that are trying to inhabit this space in Canada. Although our two companies are not competitors (who could possibly compete with us, or them for that matter?), we cohabit this contentious space. I have included both the letter in question and my inevitable response below. Don't worry, it has passed our PG-13 screen.
Letters Edition (Commentary will be back next week):
Letter No. 1:
Brothers salams... I am very saddened to see your firms on-going critical and cynical outlook on the current state of Islamic Finance. It would be prudent for you to tone it down a bit and perhaps highlight articles like the one below that does not make a mockery of our deen. With idots (sic) like the MCC criticizing Islamic Finance we don't need Ittihad being perceived as joining such ranks... Please forgive me if I have hurt your feelings but I am getting very very fed up with this on-going unnecessary distribution of e-mails and rumors in the community. Especially given the fact that I heard first hand from a Bay Street broker of a large Institution that your staff is concerned about some details on our prospectus. We need to work together as a Ummaah and NOT be perceived as divided especially amongst the non-Muslims professionals. This is very sad indeed and makes us look really really foolish as a Umaah that was suppose to be together as a brotherhood and not be indulging in such blatent Back-biting. IF we have issues with our respective businessess we should make a first effort to content each other before disseminating information to 3rd parties.p.s. Article: 'Islamic finance could have prevented subprime crisis' by Amy Glass on Thursday, 24 April 2008 read more here
---
Response to Letter No. 1:
Thank you for your email. Your letter was the best I have received in many months and I look forward to much more of such praise couched within the facade of criticism. Our super-genius readership will no doubt read between the lines and see your all-too-apparent awe of our policy to be transparent and open about things that many others would rather gloss over or sweep under the rug. In order that no professional harm comes to your career, I have removed your name and that of your company. I trust that this will be acceptable to you.
Your letter, article link and 'need' to be happy raises several existential issues for us, which I will discuss below. I must, however, clarify that the newsletter (inasmuch as it is the source of your beef) is my personal production. I am of course, blessed to be at a firm that allows me to engage readers in this way, but you should know that Ittihad Policy may or may not be the same as mine, depending on the issue and circumstances. There is actually a very cute disclaimer at the end of all IWB issues that says this in the required legalese.
Although I am honoured at all your underlying praise of our company, I will take you up on your offer to respond to some surface criticisms first.
Just a few points for you to consider:
1. As Ittihad exists as a local firm without ties to established multinationals or foreign parties, it is in our nature to cause both sadness and happiness to people. There are people we are committed to making happy and then some people about whose happiness we are unfortunately not mandated to worry as much. I know this might come as a bit of a surprise since you are in the financial industry yourself, but Ittihad actually exists to make it's shareholders / directors / clients / investors & regulators happy, not the 'Islamic Finance' industry. It would be difficult at this point for us to re-jig the structure of the firm and our mandate to include your happiness as our goal, but I will do the needful and try and get this onto the Board's agenda. As we Muslims say - InshAllah (God-willing).
2. I assure you that Ittihad is neither cynical nor critical of Islamic Finance. We are blessed to be able to work in the field on our own terms and are fully seized of the great responsibility on our shoulders when we use the words Islam and Finance in the same phrase. Personally, I am at a loss to understand why you would think me 'cynical' and 'critical' - I will stubbornly console myself with the thought that you perhaps meant to say 'thoughtful' and 'astute'. Reading between the lines of your letter confirms my view.
3. With regard to your reference to being 'prudent', I do not understand how can it be 'prudent' to accept wholesale and unthinkingly what the conventional system labels as Islamic? In my opinion, that is called 'Foolishness' at best and 'Hypocrisy' at its worst. Also, it is not a small, humble newsletter that few Muslims read that makes a mockery of our religion but rather the injudicious and gratuitous use of Islam as a marketing gimmick and advertising tool. Just calling ourselves 'Islamic' does not remove the onus from us to actually be Islamic, it is meant to be the other way around. Let us agree then, to disagree on who does more damage to Islamic Finance.
4. I did not know that the MCC (Melbourne Cricket Club??) had uncharitable views on Islamic Finance, but I assure you that ours are our own. Canada is Alhamdullillah (Praise be to God), a free country and we both love and celebrate the free exchange of debate and ideas.
5. As you no doubt know already, a prospectus is a public document mandated by the Ontario Securities Commission. If yours is embarrassing or was meant to be secret, perhaps it should be renamed or withdrawn from the public record. I see no reason why two people should not be able to discuss a public document candidly, especially as our concerns have been brought up in person with members of your Shariah Board and yourself already.
6. The article that you have sent us is insipidly named but does indeed merit a read. It ends by saying '... (Islamic) banks only look to maximize their profits. They know that there is no real difference between conventional banks and Islamic Finance'. I did not get a clear picture of your views on this, but is this practice not making a mockery of Islam? Furthermore, it is not at all true and quite besides the point that what passes for 'Islamic' Finance these days 'could have prevented SubPrime'. The whole point of Islamic Finance is that subprime issues would not even arise. I am sure that this crucial distinction will not escape you as you read more of the Ittihad Weekly with an open mind.
I hope that I have not hurt your feelings, but like you, I am also getting fed-up with businesses whose purpose seems to be getting as much Muslim money under their belts as possible, using any and all means necessary. Furthermore, I am beyond fed-up with this tiptoe-ing around the problematic issues within Islamic Finance in the interests of a false consensus that large companies want to dictate. If this is what Islamic Finance is, then I want no part of it. Please feel free to use your position in the industry to have me excommunicated.
Finally, I wish you great success in uniting the 'Ummah' and keeping it from looking foolish. I am sure that the various tricks 'Islamic' Finance professionals devise to profit from 'interest' makes Muslims look like geniuses instead. Thank you for writing.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO's topic of discussion will be on the 'Ethical Dimensions of Islamic Finance' and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. Good article (too short though) on what young people starting out in life absolutely must know about their finances ... read more here
2. Who says that the financial sector learns from its mistakes? These are the same hedge fund people that caused the Multi-Billion loss when they were at Long Term Capital Management in the late 1990's ... read more here
Economic News:
1. Following up last week's commentary ... the environmental impact of food transportation ... read more here
2. North American Food Processing companies are having a field day. High profits, high share prices, lots of hungry people, what more can we ask for? ... read more here
3. Is Canada Recession-Proof? ... read more here
4. I can't believe at the sheer gall of this plan. The new BOC Governor wants taxpayers to allow him to buy all sorts of non-performing investments on their behalf in order to relieve pain for the private sector ... read about it, think about it, call your MP and 'Just Say No' ... read more here
5. This is how recessions start ... with the closing of retail stores ... read more here
Islamic / Middle East / Emerging Markets:
1. A primarily Canadian (but not exclusively so) company on how to make it big in Islamic Finance ... read more here
Interesting but not Finance:
1. Issues with wind energy? Say it ain't so ... read more here
2. The price of Oil is $120 a barrel, but what is the price of water? ... read more here
'The critic has to educate the public. The artist has to educate the critic.' - Oscar Wilde
Alas, I have been accused below of being a mere critic. I received a letter from someone at a company that that has an Islamic Finance 'window' in addition to their regular business. The person takes exception to the irreverent way in which I seem to be discussing 'Islamic Finance' and the companies that are trying to inhabit this space in Canada. Although our two companies are not competitors (who could possibly compete with us, or them for that matter?), we cohabit this contentious space. I have included both the letter in question and my inevitable response below. Don't worry, it has passed our PG-13 screen.
Letters Edition (Commentary will be back next week):
Letter No. 1:
Brothers salams... I am very saddened to see your firms on-going critical and cynical outlook on the current state of Islamic Finance. It would be prudent for you to tone it down a bit and perhaps highlight articles like the one below that does not make a mockery of our deen. With idots (sic) like the MCC criticizing Islamic Finance we don't need Ittihad being perceived as joining such ranks... Please forgive me if I have hurt your feelings but I am getting very very fed up with this on-going unnecessary distribution of e-mails and rumors in the community. Especially given the fact that I heard first hand from a Bay Street broker of a large Institution that your staff is concerned about some details on our prospectus. We need to work together as a Ummaah and NOT be perceived as divided especially amongst the non-Muslims professionals. This is very sad indeed and makes us look really really foolish as a Umaah that was suppose to be together as a brotherhood and not be indulging in such blatent Back-biting. IF we have issues with our respective businessess we should make a first effort to content each other before disseminating information to 3rd parties.p.s. Article: 'Islamic finance could have prevented subprime crisis' by Amy Glass on Thursday, 24 April 2008 read more here
---
Response to Letter No. 1:
Thank you for your email. Your letter was the best I have received in many months and I look forward to much more of such praise couched within the facade of criticism. Our super-genius readership will no doubt read between the lines and see your all-too-apparent awe of our policy to be transparent and open about things that many others would rather gloss over or sweep under the rug. In order that no professional harm comes to your career, I have removed your name and that of your company. I trust that this will be acceptable to you.
Your letter, article link and 'need' to be happy raises several existential issues for us, which I will discuss below. I must, however, clarify that the newsletter (inasmuch as it is the source of your beef) is my personal production. I am of course, blessed to be at a firm that allows me to engage readers in this way, but you should know that Ittihad Policy may or may not be the same as mine, depending on the issue and circumstances. There is actually a very cute disclaimer at the end of all IWB issues that says this in the required legalese.
Although I am honoured at all your underlying praise of our company, I will take you up on your offer to respond to some surface criticisms first.
Just a few points for you to consider:
1. As Ittihad exists as a local firm without ties to established multinationals or foreign parties, it is in our nature to cause both sadness and happiness to people. There are people we are committed to making happy and then some people about whose happiness we are unfortunately not mandated to worry as much. I know this might come as a bit of a surprise since you are in the financial industry yourself, but Ittihad actually exists to make it's shareholders / directors / clients / investors & regulators happy, not the 'Islamic Finance' industry. It would be difficult at this point for us to re-jig the structure of the firm and our mandate to include your happiness as our goal, but I will do the needful and try and get this onto the Board's agenda. As we Muslims say - InshAllah (God-willing).
2. I assure you that Ittihad is neither cynical nor critical of Islamic Finance. We are blessed to be able to work in the field on our own terms and are fully seized of the great responsibility on our shoulders when we use the words Islam and Finance in the same phrase. Personally, I am at a loss to understand why you would think me 'cynical' and 'critical' - I will stubbornly console myself with the thought that you perhaps meant to say 'thoughtful' and 'astute'. Reading between the lines of your letter confirms my view.
3. With regard to your reference to being 'prudent', I do not understand how can it be 'prudent' to accept wholesale and unthinkingly what the conventional system labels as Islamic? In my opinion, that is called 'Foolishness' at best and 'Hypocrisy' at its worst. Also, it is not a small, humble newsletter that few Muslims read that makes a mockery of our religion but rather the injudicious and gratuitous use of Islam as a marketing gimmick and advertising tool. Just calling ourselves 'Islamic' does not remove the onus from us to actually be Islamic, it is meant to be the other way around. Let us agree then, to disagree on who does more damage to Islamic Finance.
4. I did not know that the MCC (Melbourne Cricket Club??) had uncharitable views on Islamic Finance, but I assure you that ours are our own. Canada is Alhamdullillah (Praise be to God), a free country and we both love and celebrate the free exchange of debate and ideas.
5. As you no doubt know already, a prospectus is a public document mandated by the Ontario Securities Commission. If yours is embarrassing or was meant to be secret, perhaps it should be renamed or withdrawn from the public record. I see no reason why two people should not be able to discuss a public document candidly, especially as our concerns have been brought up in person with members of your Shariah Board and yourself already.
6. The article that you have sent us is insipidly named but does indeed merit a read. It ends by saying '... (Islamic) banks only look to maximize their profits. They know that there is no real difference between conventional banks and Islamic Finance'. I did not get a clear picture of your views on this, but is this practice not making a mockery of Islam? Furthermore, it is not at all true and quite besides the point that what passes for 'Islamic' Finance these days 'could have prevented SubPrime'. The whole point of Islamic Finance is that subprime issues would not even arise. I am sure that this crucial distinction will not escape you as you read more of the Ittihad Weekly with an open mind.
I hope that I have not hurt your feelings, but like you, I am also getting fed-up with businesses whose purpose seems to be getting as much Muslim money under their belts as possible, using any and all means necessary. Furthermore, I am beyond fed-up with this tiptoe-ing around the problematic issues within Islamic Finance in the interests of a false consensus that large companies want to dictate. If this is what Islamic Finance is, then I want no part of it. Please feel free to use your position in the industry to have me excommunicated.
Finally, I wish you great success in uniting the 'Ummah' and keeping it from looking foolish. I am sure that the various tricks 'Islamic' Finance professionals devise to profit from 'interest' makes Muslims look like geniuses instead. Thank you for writing.
--------------
MAP Canada is hosting an event for young businesses on the 10th of May. Some great local entrepreneurs from successful public (and private) businesses will be there to speak and provide mentorship to the up and coming successes of tomorrow. Within a set of true luminaries, MAP Canada has also taken a humungous risk and invited your humble correspondent as a speaker. I hope that many of you will attend. My contribution to the festivities are supposed to address the question of 'How to Raise Capital for Your Business', so you know there will be some fireworks. This is a volunteer organization that deserves our support and it is always interesting to see where the community is headed economically. Lunch will also be served. Please register here
There is also a conference in NY that our Senior Management will be attending. Our CEO's topic of discussion will be on the 'Ethical Dimensions of Islamic Finance' and how the one cannot and should not be divorced from the other with ease. The One being Ethics and the other being Islamic Finance, which in better times were explicitly known to be irrevocably connected. For those who can make it to NY, it may be an excellent working holiday and an educational experience. Please Register Here for your 15% discount.
Finance News:
1. Good article (too short though) on what young people starting out in life absolutely must know about their finances ... read more here
2. Who says that the financial sector learns from its mistakes? These are the same hedge fund people that caused the Multi-Billion loss when they were at Long Term Capital Management in the late 1990's ... read more here
Economic News:
1. Following up last week's commentary ... the environmental impact of food transportation ... read more here
2. North American Food Processing companies are having a field day. High profits, high share prices, lots of hungry people, what more can we ask for? ... read more here
3. Is Canada Recession-Proof? ... read more here
4. I can't believe at the sheer gall of this plan. The new BOC Governor wants taxpayers to allow him to buy all sorts of non-performing investments on their behalf in order to relieve pain for the private sector ... read about it, think about it, call your MP and 'Just Say No' ... read more here
5. This is how recessions start ... with the closing of retail stores ... read more here
Islamic / Middle East / Emerging Markets:
1. A primarily Canadian (but not exclusively so) company on how to make it big in Islamic Finance ... read more here
Interesting but not Finance:
1. Issues with wind energy? Say it ain't so ... read more here
2. The price of Oil is $120 a barrel, but what is the price of water? ... read more here
The Anatomy of an Islamic Finance Deal
Quote of the Week:
'Over the next two years, 1.8 million more subprime mortgages, those aimed at riskier borrowers, are expected to reset at higher interest rates, prompting many experts to say the worst is yet to come. It is expected that as many 1.2 million of the loans will go into foreclosure and even those who don't default will barely get by after making their payments.' - Paul Waldie in the Globe and Mail.
Simple Calc. - 1,200,000 (No. of homes) x 300,000 (avg. price of home) = $360,000,000,000 - or $360 Billion. These are the obvious, expected loan losses. As the loans are called in, other assets will be affected as they are sold to meet debt payments etc. This general contraction will thus have a negative multiplier effect. As people begin to price assets for pennies on the dollar, the big question will be whether consumers continue to buy assets thinking they are 'cheap', or whether consumers delay purchases because they think things will get 'cheaper'. The first choice leads to a recovery, the second to deflation and stagnation as in Japan. Sort of puts the $145 Billion aid package in perspective, which explains why the markets fell so drastically after this announcement.
Commentary for the Week:
The Anatomy of an Islamic Finance Deal:
Many people ask me simple sounding questions such as 'How is Islamic Finance different?', or 'What makes Islamic Finance 'Islamic'?. This usually happens at a dinner or event where I have about 20 seconds to summarize and answer questions that people spend years researching. What is worse is that sometimes people ask me these just as I am about to launch into a delectable main course, so there is a clear conflict of interest between me doing justice to the question, and me doing justice to the cook's labours. This usually results in a mumbled response about how 'interest' is almost as bad as mushrooms, which results in a confused audience that is unable to focus until dessert. I exaggerate of course, but only just. Recently however, someone asked me to give them not an overview but an example of how Islamic Finance is different. I thought that was a brilliant question and what follows is an example that makes the difference strikingly clear.
Instead of launching into theories on Finance again, lets imagine a simple scenario. Abu the Architect and Bill the Builder have an idea and concept for a Green building. They identify the property, land, the subcontractors and the buyer. The buyer puts down a deposit and agrees to buy the building after construction, which will take one year. Now all they need is to finance the project so they can commence with the digging and construction. The land and construction is slated to cost $1.1M and the building concept has been sold to the buyer for $1.5M. The deposit is $100k and Abu and Bill have the option to seek conventional, or Islamic financing, for the rest.
Scenario 1 - Conventional:
Abu and Bill seek conventional project financing. They are given a line of credit or mezzanine facility at a floating 12% interest. This means that they will have to pay 1% of whatever they have borrowed every month. As they will probably not borrow the full amount up front, their interest payments will be low in the beginning and balloon quickly as the cumulative amount they have spent increases and the project construction comes to a close. Let us assume that they will borrow $350k for the land and $350k for the first phase of construction up-front. In another 6 months, they will borrow the last $300k. For the first six months, they will be paying $7000/mth. After 6 months, they will be paying $9000 / mth. This means that the total they will have paid in interest will be $96,000 and the profit on the deal would be $304,000 ($1.5M - $1.1M - $96k). If Abu and Bill default on their monthly cash obligation, they will lose the entire project as the creditors will seize the property to retrieve their $1M. If the uncompleted property sells for less than $1M, they will be sued for the difference. From their perspective, this is a high stakes game. There is possibility for large gains, but the risk to them is not negligible either. As the property itself does not generate cash on a monthly basis, the interest costs must be part of the initial borrowing.
Scenario 2 - Islamic Finance:
Abu and Bill seek funding on a profit and loss sharing basis. They require $1.1M for the land and construction, out of which they have $100K already (the buyer's deposit). Abu and Bill are introduced to 10 investors by Islamic financiers such as yours truly. Each investor puts in $100k, sharing in a percentage of the profits / losses at the end. Let us say that the Builders and Islamic Finance co. are given 50% of the profits between them, and investors are to enjoy 50%. The building is completed on time (just as in scenario 1) and the buyer pays the rest of the balance in a year. The profit is in this scenario is $400k ($1.5M - $1.1M), of which 50%, or $200k goes to the 10 investors in addition to their capital. This translates into $20,000 profit on the deal per investor, representing a 20% Return on Investment over the year in question.
As you can see, the payout scenarios, risk profile and economic consequences of the two scenarios are quite different. Both scenarios are profitable for the parties concerned, but distribute profits in different ways. The first concentrates both wealth and risk such that the decision as to whether capital should be allocated to this endeavour rests with primarily the builders and a creditor. The second allows a broader section of the public to decide whether this project will be beneficial and for them to participate as partners. Also, the second scenario spreads wealth around the community while minimizing the risk inherent in monthly debt obligations. Both solutions work, but for different kinds of people.
The first scenario appeals to people who enjoy quick success. The second appeals to people who enjoy a shared success even more. The first appeals to people willing to take risks for quick success, the second to those that want to grow sustainably. One builds individuals and then a sense of community through them. The other builds community first and foremost, which is kind of the whole point of society, isn't it?
___________________
Scenario two is actually a close approximation of a deal that we are currently involved with, so it is not an ideal type that exists in books only. For those who want to judge whether Islamic Finance can really be different, I invite you to investigate further. Islamic Finance frequently comes under a lot of vituperation based on the folly of large, multinational institutions and their quest for new customers and our small company always gets lumped in with them for undeserved abuse as well. Although we are a small company, our intent and endeavour is to enhance the quality of choices available to all Canadians, not to display a thin veneer of piety over questionable ethics. I hope you will keep that mind and judge for yourself as you read the 3rd article in section 3 below.
Finance News:
1. Trader causes $7Billion loss at France's SG. Still think banks make money just buy the spread between what they pay to depositors and what they charge to lenders? ... read more here
2. How time engineers the best comebacks ... Mittal is doing to Europe what Europe and the East India Company did to India ... sending dividends back home ... read more here
Economic News:
1. Is the US housing mess headed our way? ... read more here
2. Talk about throwing money at a problem ... the US President unveils a $145B plan to 'spur' the US economy ... read more here
Islamic & Middle Eastern Finance:
1. Some changes on the horizon for OPEC members? ... Abu Dhabi investing $15B into clean energy ... read more here
2. Excellent article on what effect the concentration of Oil Wealth has on the world economy. The research on where this money has been invested recently is both timely and interesting. I don't think this is even close to the full picture because there is money cycled through the World Bank and IMF also. Plus there are official aid flows and investments into offshore funds that were not addressed in the 'Fueling Liquidity' section of the report. Nevertheless, a must read article because it summarizes things quite well ... read more here
3. A well-known commentator argues against Islamic Finance. While parts of the argument hold for many multinational banks getting into this space in a hurry, there are several problems with his view. First, he again misses the point that if we look at almost 5000 yrs of recorded history, all Abrahamic faiths and others as well were not confused on how Interest=Usury. It is only the last couple of centuries that fractional reserve banking has taken over and confused the issue. Second, he oversimplifies and mischaracterizes the argument made by the two authors he mentions. Dr. Saleem is not against Islamic Finance, he is against the fact that standards in the industry are so loose and what passes for Islamic Finance is frequently just marketing. Dr. Kuran's critique is a deeper questioning of whether finance and faith can mix and what happens when they do. Neither of them reduces Islamic Finance to a Mullah inspired industry, which is a gross oversimplification. Finally, Hassan Al-Banna and Maududi had about as much to do with Islamic Finance as a kangaroo does with Global warming - (which is minimal, as I understand it). Perhaps one of you will tell our newly-minted, self-appointed, 'financial expert' that Islamic Finance cannot be summed up in a shoddily researched newspaper column. Well, not intelligently anyway ... read more here
Miscellaneous / Personal Finance:
1. How to make a million! - even though the headline is cheapish and sensational, the article is refreshingly free of easy gimmicks and is quite good for the younger generation ... people over 40 have to work a bit harder though ... read more here
'Over the next two years, 1.8 million more subprime mortgages, those aimed at riskier borrowers, are expected to reset at higher interest rates, prompting many experts to say the worst is yet to come. It is expected that as many 1.2 million of the loans will go into foreclosure and even those who don't default will barely get by after making their payments.' - Paul Waldie in the Globe and Mail.
Simple Calc. - 1,200,000 (No. of homes) x 300,000 (avg. price of home) = $360,000,000,000 - or $360 Billion. These are the obvious, expected loan losses. As the loans are called in, other assets will be affected as they are sold to meet debt payments etc. This general contraction will thus have a negative multiplier effect. As people begin to price assets for pennies on the dollar, the big question will be whether consumers continue to buy assets thinking they are 'cheap', or whether consumers delay purchases because they think things will get 'cheaper'. The first choice leads to a recovery, the second to deflation and stagnation as in Japan. Sort of puts the $145 Billion aid package in perspective, which explains why the markets fell so drastically after this announcement.
Commentary for the Week:
The Anatomy of an Islamic Finance Deal:
Many people ask me simple sounding questions such as 'How is Islamic Finance different?', or 'What makes Islamic Finance 'Islamic'?. This usually happens at a dinner or event where I have about 20 seconds to summarize and answer questions that people spend years researching. What is worse is that sometimes people ask me these just as I am about to launch into a delectable main course, so there is a clear conflict of interest between me doing justice to the question, and me doing justice to the cook's labours. This usually results in a mumbled response about how 'interest' is almost as bad as mushrooms, which results in a confused audience that is unable to focus until dessert. I exaggerate of course, but only just. Recently however, someone asked me to give them not an overview but an example of how Islamic Finance is different. I thought that was a brilliant question and what follows is an example that makes the difference strikingly clear.
Instead of launching into theories on Finance again, lets imagine a simple scenario. Abu the Architect and Bill the Builder have an idea and concept for a Green building. They identify the property, land, the subcontractors and the buyer. The buyer puts down a deposit and agrees to buy the building after construction, which will take one year. Now all they need is to finance the project so they can commence with the digging and construction. The land and construction is slated to cost $1.1M and the building concept has been sold to the buyer for $1.5M. The deposit is $100k and Abu and Bill have the option to seek conventional, or Islamic financing, for the rest.
Scenario 1 - Conventional:
Abu and Bill seek conventional project financing. They are given a line of credit or mezzanine facility at a floating 12% interest. This means that they will have to pay 1% of whatever they have borrowed every month. As they will probably not borrow the full amount up front, their interest payments will be low in the beginning and balloon quickly as the cumulative amount they have spent increases and the project construction comes to a close. Let us assume that they will borrow $350k for the land and $350k for the first phase of construction up-front. In another 6 months, they will borrow the last $300k. For the first six months, they will be paying $7000/mth. After 6 months, they will be paying $9000 / mth. This means that the total they will have paid in interest will be $96,000 and the profit on the deal would be $304,000 ($1.5M - $1.1M - $96k). If Abu and Bill default on their monthly cash obligation, they will lose the entire project as the creditors will seize the property to retrieve their $1M. If the uncompleted property sells for less than $1M, they will be sued for the difference. From their perspective, this is a high stakes game. There is possibility for large gains, but the risk to them is not negligible either. As the property itself does not generate cash on a monthly basis, the interest costs must be part of the initial borrowing.
Scenario 2 - Islamic Finance:
Abu and Bill seek funding on a profit and loss sharing basis. They require $1.1M for the land and construction, out of which they have $100K already (the buyer's deposit). Abu and Bill are introduced to 10 investors by Islamic financiers such as yours truly. Each investor puts in $100k, sharing in a percentage of the profits / losses at the end. Let us say that the Builders and Islamic Finance co. are given 50% of the profits between them, and investors are to enjoy 50%. The building is completed on time (just as in scenario 1) and the buyer pays the rest of the balance in a year. The profit is in this scenario is $400k ($1.5M - $1.1M), of which 50%, or $200k goes to the 10 investors in addition to their capital. This translates into $20,000 profit on the deal per investor, representing a 20% Return on Investment over the year in question.
As you can see, the payout scenarios, risk profile and economic consequences of the two scenarios are quite different. Both scenarios are profitable for the parties concerned, but distribute profits in different ways. The first concentrates both wealth and risk such that the decision as to whether capital should be allocated to this endeavour rests with primarily the builders and a creditor. The second allows a broader section of the public to decide whether this project will be beneficial and for them to participate as partners. Also, the second scenario spreads wealth around the community while minimizing the risk inherent in monthly debt obligations. Both solutions work, but for different kinds of people.
The first scenario appeals to people who enjoy quick success. The second appeals to people who enjoy a shared success even more. The first appeals to people willing to take risks for quick success, the second to those that want to grow sustainably. One builds individuals and then a sense of community through them. The other builds community first and foremost, which is kind of the whole point of society, isn't it?
___________________
Scenario two is actually a close approximation of a deal that we are currently involved with, so it is not an ideal type that exists in books only. For those who want to judge whether Islamic Finance can really be different, I invite you to investigate further. Islamic Finance frequently comes under a lot of vituperation based on the folly of large, multinational institutions and their quest for new customers and our small company always gets lumped in with them for undeserved abuse as well. Although we are a small company, our intent and endeavour is to enhance the quality of choices available to all Canadians, not to display a thin veneer of piety over questionable ethics. I hope you will keep that mind and judge for yourself as you read the 3rd article in section 3 below.
Finance News:
1. Trader causes $7Billion loss at France's SG. Still think banks make money just buy the spread between what they pay to depositors and what they charge to lenders? ... read more here
2. How time engineers the best comebacks ... Mittal is doing to Europe what Europe and the East India Company did to India ... sending dividends back home ... read more here
Economic News:
1. Is the US housing mess headed our way? ... read more here
2. Talk about throwing money at a problem ... the US President unveils a $145B plan to 'spur' the US economy ... read more here
Islamic & Middle Eastern Finance:
1. Some changes on the horizon for OPEC members? ... Abu Dhabi investing $15B into clean energy ... read more here
2. Excellent article on what effect the concentration of Oil Wealth has on the world economy. The research on where this money has been invested recently is both timely and interesting. I don't think this is even close to the full picture because there is money cycled through the World Bank and IMF also. Plus there are official aid flows and investments into offshore funds that were not addressed in the 'Fueling Liquidity' section of the report. Nevertheless, a must read article because it summarizes things quite well ... read more here
3. A well-known commentator argues against Islamic Finance. While parts of the argument hold for many multinational banks getting into this space in a hurry, there are several problems with his view. First, he again misses the point that if we look at almost 5000 yrs of recorded history, all Abrahamic faiths and others as well were not confused on how Interest=Usury. It is only the last couple of centuries that fractional reserve banking has taken over and confused the issue. Second, he oversimplifies and mischaracterizes the argument made by the two authors he mentions. Dr. Saleem is not against Islamic Finance, he is against the fact that standards in the industry are so loose and what passes for Islamic Finance is frequently just marketing. Dr. Kuran's critique is a deeper questioning of whether finance and faith can mix and what happens when they do. Neither of them reduces Islamic Finance to a Mullah inspired industry, which is a gross oversimplification. Finally, Hassan Al-Banna and Maududi had about as much to do with Islamic Finance as a kangaroo does with Global warming - (which is minimal, as I understand it). Perhaps one of you will tell our newly-minted, self-appointed, 'financial expert' that Islamic Finance cannot be summed up in a shoddily researched newspaper column. Well, not intelligently anyway ... read more here
Miscellaneous / Personal Finance:
1. How to make a million! - even though the headline is cheapish and sensational, the article is refreshingly free of easy gimmicks and is quite good for the younger generation ... people over 40 have to work a bit harder though ... read more here
Island Paradise II
Quote of the day:
'Inflation will reduce Americans' purchasing power. Deflation will collapse the value of their assets. Between the anvil of falling prices ... and the hammer of rising ones - the American middle class is going to get smashed.' - Bill Bonner from The Daily Reckoning
Bonner makes the case that what is happening South of the border today, is very similar to what happened in Japan during the 1990's. What this would mean for Canada is the big question. We have Oil of course, but that seems like a bit of a shallow defence if our only customer for our exports no longer has money to buy our stuff. Remember all the times we took sides against China? India? Brazil?
Commentary for the Week:
Island Paradise - Part II
This week we go back to the island paradise of last year (IWB Issue 8) to resolve some outstanding questions. On a loan to each of John, Jacob and Jaffer of $1000 Absurdodollars at 5% simple annual interest, the outstanding questions were:
1. How many years will it take for John, Jacob and Jaffer to pay me back?
2. How much am I guaranteed to make in a year? How much are the boys guaranteed to make?
3. If the boys just have to pay interest at the end of every year and there are no bankruptcy courts, what will happen to all productive assets on the island?
4. How many years before one of them runs out of money? How many years before all of them run out?
Since not many of our dear readers were perhaps quite busy over the holiday season, many did not attempt these brain-teasers. As such, I will try my best, but please correct me if you think I am wrong.
1. John, Jacob and Jaffer will actually never be able to pay me back. Between the three of them, they have $3000 only. On top of this, they must pay me pack $450 ($150 each). As I am the only one with an extra supply of Absurdodollars, one or more of them will have to declare his inability to pay me back.
2. Even though I have done very little productive work such as farming, carpentry or baking, in theory I am guaranteed a return of $450. The J-boys are not even guaranteed $1 in theory. In fact, they are guaranteed to lose money because they have to compete amongst themselves for the extra $150 that each needs. They cannot get that extra $150 they have to pay me back with except from each other's original $3000. Instead of a collegial atmosphere of working together, you can rest assured that in some ways, they are now working against each other. The island paradise, with the introduction of debt-based money, soon becomes quite stressful. Each day they wake, they know that they have to make around $0.41 AbsurdoCents ($150/365 days) to meet their year-end obligations.
3. They own or control real assets such as an oven, land and tools, whereas I own some printed paper on a deserted island. At the end of the year however, once I know which one or two of them will be short of $150, I can easily ask one of them to give me his tools/assets instead of the $150. In this way, I become not only the arbiter of financial services but also the mechanism through which real assets in the economy are traded or controlled.
4. At least one of them is guaranteed to be short the $150 that he needs to pay me back by next year. Let us however, make this question more interesting. Let us assume that I tell them that they can pay me only interest if they wish. That means that they can pay me $150/yr each and I will let them keep the capital of $1000 as long as they wish. Even in this apparently liberal debt regime, it will take less than 7 years for me to claim everything on the island ($3000/$450) because that is when the J-boys will simply run out of AbsurdoDollars.
As you can see, this is a pretty extreme result of what started off as a service to the community. Simply by the virtue of having some printed paper, in 7 slothful years, I can own all productive assets. While this is a grossly oversimplified model of an economy, this model does have some lessons for us. First and foremost, we have to realize that indebtedness is not necessarily a natural state of being - we got here because of our choices, not evolution. The second is that speculative sectors of the economy do not add value in the same way that real skills do. There is big difference between sectors that create value, and those that shift it around. The final lesson of course, is inescapable - I must move to Paradise Island.
(I apologize for the typos in Issue 8, I failed to recheck the commentary before I emailed it.)
Finance News:
1. Looking behind the $100/barrel price of Oil ... only a 1000 barrels were traded at $100 ... but it made news ... http://www.theglobeandmail.com/blogs/wenergyblog0613
2. Merrill Lynch is going to post a $15B loss from subprime ... but guess who they are going after to make up the capital? ... http://www.reuters.com/article/fundsFundsNews/idUST29249020080111
3. Some of the politics behind Carbon offsets ... http://www.nytimes.com/2008/01/09/business/09offsets.html?_r=1&oref=slogin
4. Guess where else Tony Blair is working in addition to 'solving' the Middle East Crisis ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080110.wblairbank0110/BNStory/Business/?cid=al_gam_nletter_maropen and guess what his first deal is ... http://www.nytimes.com/reuters/business/reuters-northernrock.html?ex=1357707600&en=5576193f0e6b35ff&ei=5088&partner=rssnyt&emc=rss
Economic News:
1. Many people think that economic growth in China is dependent on exports. This means that if the US economy tanks, China's economy will not be far behind. This article argues something different - that China's economy has actually reached a point such that an export slowdown will not slow economic growth appreciably. Very interesting analysis with all sorts of political implications if it is true ... http://www.economist.com/finance/displaystory.cfm?story_id=10429271
2. Good News from Merrill Lynch about your mortgage, but not so good for your income ... Recessionary fears are made public ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080109.wecooutlook0109/BNStory/robNews/home
3. CIBC says gas will be $1.50 soon ... This is funny, I've never really thought that CIBC can be right on anything but there you have it. You heard it from CIBC first ... http://www.financialpost.com/story.html?id=228661
4. News about the Loonie ... this speaks to the theory that regardless of our Oil and resources, the Loonie will be dragged down by the US relative to Asian / European currencies ... Perhaps this explains a little bit about how dependence on one customer for exports generates all kinds of vulnerabilities ... http://www.blackswantrading.com/files/3d9b61b67aa06a6/bsccc011108.pdf
Islamic / Middle East Finance:
1. Thinking of investing in solar energy? ... Some factors and companies to consider ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080110.wrchinasun10/BNStory/SpecialEvents2/home
Miscellaneous:
1. Tata's $2500 car is unveiled ... a good discussion of how it may affect climate change but I didn't expect the Globe to be so negative. I think they would have been full of praise if this car was American instead of Indian ... then it would have been Progress ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080110.wtatacar0110/BNStory/Business/home
'Inflation will reduce Americans' purchasing power. Deflation will collapse the value of their assets. Between the anvil of falling prices ... and the hammer of rising ones - the American middle class is going to get smashed.' - Bill Bonner from The Daily Reckoning
Bonner makes the case that what is happening South of the border today, is very similar to what happened in Japan during the 1990's. What this would mean for Canada is the big question. We have Oil of course, but that seems like a bit of a shallow defence if our only customer for our exports no longer has money to buy our stuff. Remember all the times we took sides against China? India? Brazil?
Commentary for the Week:
Island Paradise - Part II
This week we go back to the island paradise of last year (IWB Issue 8) to resolve some outstanding questions. On a loan to each of John, Jacob and Jaffer of $1000 Absurdodollars at 5% simple annual interest, the outstanding questions were:
1. How many years will it take for John, Jacob and Jaffer to pay me back?
2. How much am I guaranteed to make in a year? How much are the boys guaranteed to make?
3. If the boys just have to pay interest at the end of every year and there are no bankruptcy courts, what will happen to all productive assets on the island?
4. How many years before one of them runs out of money? How many years before all of them run out?
Since not many of our dear readers were perhaps quite busy over the holiday season, many did not attempt these brain-teasers. As such, I will try my best, but please correct me if you think I am wrong.
1. John, Jacob and Jaffer will actually never be able to pay me back. Between the three of them, they have $3000 only. On top of this, they must pay me pack $450 ($150 each). As I am the only one with an extra supply of Absurdodollars, one or more of them will have to declare his inability to pay me back.
2. Even though I have done very little productive work such as farming, carpentry or baking, in theory I am guaranteed a return of $450. The J-boys are not even guaranteed $1 in theory. In fact, they are guaranteed to lose money because they have to compete amongst themselves for the extra $150 that each needs. They cannot get that extra $150 they have to pay me back with except from each other's original $3000. Instead of a collegial atmosphere of working together, you can rest assured that in some ways, they are now working against each other. The island paradise, with the introduction of debt-based money, soon becomes quite stressful. Each day they wake, they know that they have to make around $0.41 AbsurdoCents ($150/365 days) to meet their year-end obligations.
3. They own or control real assets such as an oven, land and tools, whereas I own some printed paper on a deserted island. At the end of the year however, once I know which one or two of them will be short of $150, I can easily ask one of them to give me his tools/assets instead of the $150. In this way, I become not only the arbiter of financial services but also the mechanism through which real assets in the economy are traded or controlled.
4. At least one of them is guaranteed to be short the $150 that he needs to pay me back by next year. Let us however, make this question more interesting. Let us assume that I tell them that they can pay me only interest if they wish. That means that they can pay me $150/yr each and I will let them keep the capital of $1000 as long as they wish. Even in this apparently liberal debt regime, it will take less than 7 years for me to claim everything on the island ($3000/$450) because that is when the J-boys will simply run out of AbsurdoDollars.
As you can see, this is a pretty extreme result of what started off as a service to the community. Simply by the virtue of having some printed paper, in 7 slothful years, I can own all productive assets. While this is a grossly oversimplified model of an economy, this model does have some lessons for us. First and foremost, we have to realize that indebtedness is not necessarily a natural state of being - we got here because of our choices, not evolution. The second is that speculative sectors of the economy do not add value in the same way that real skills do. There is big difference between sectors that create value, and those that shift it around. The final lesson of course, is inescapable - I must move to Paradise Island.
(I apologize for the typos in Issue 8, I failed to recheck the commentary before I emailed it.)
Finance News:
1. Looking behind the $100/barrel price of Oil ... only a 1000 barrels were traded at $100 ... but it made news ... http://www.theglobeandmail.com/blogs/wenergyblog0613
2. Merrill Lynch is going to post a $15B loss from subprime ... but guess who they are going after to make up the capital? ... http://www.reuters.com/article/fundsFundsNews/idUST29249020080111
3. Some of the politics behind Carbon offsets ... http://www.nytimes.com/2008/01/09/business/09offsets.html?_r=1&oref=slogin
4. Guess where else Tony Blair is working in addition to 'solving' the Middle East Crisis ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080110.wblairbank0110/BNStory/Business/?cid=al_gam_nletter_maropen and guess what his first deal is ... http://www.nytimes.com/reuters/business/reuters-northernrock.html?ex=1357707600&en=5576193f0e6b35ff&ei=5088&partner=rssnyt&emc=rss
Economic News:
1. Many people think that economic growth in China is dependent on exports. This means that if the US economy tanks, China's economy will not be far behind. This article argues something different - that China's economy has actually reached a point such that an export slowdown will not slow economic growth appreciably. Very interesting analysis with all sorts of political implications if it is true ... http://www.economist.com/finance/displaystory.cfm?story_id=10429271
2. Good News from Merrill Lynch about your mortgage, but not so good for your income ... Recessionary fears are made public ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080109.wecooutlook0109/BNStory/robNews/home
3. CIBC says gas will be $1.50 soon ... This is funny, I've never really thought that CIBC can be right on anything but there you have it. You heard it from CIBC first ... http://www.financialpost.com/story.html?id=228661
4. News about the Loonie ... this speaks to the theory that regardless of our Oil and resources, the Loonie will be dragged down by the US relative to Asian / European currencies ... Perhaps this explains a little bit about how dependence on one customer for exports generates all kinds of vulnerabilities ... http://www.blackswantrading.com/files/3d9b61b67aa06a6/bsccc011108.pdf
Islamic / Middle East Finance:
1. Thinking of investing in solar energy? ... Some factors and companies to consider ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080110.wrchinasun10/BNStory/SpecialEvents2/home
Miscellaneous:
1. Tata's $2500 car is unveiled ... a good discussion of how it may affect climate change but I didn't expect the Globe to be so negative. I think they would have been full of praise if this car was American instead of Indian ... then it would have been Progress ... http://www.reportonbusiness.com/servlet/story/RTGAM.20080110.wtatacar0110/BNStory/Business/home
The Baker, Carpenter, Farmer and the washed-up Manufacturer of Money
Quote of the day:
"We think some of the real estate companies being adversely affected are being penalised by the mortgage market" - David Jackson, the chief executive of the Dubai-government-owned investment agency, Istithmar.
You think ... ?
(It is possible that he was misquoted, but if this is the kind of rigorous, inspired thinking in place at the top of ME Sovereign Funds ... then Oil money is not in good hands. I thought the quote was important because ME companies have begun to buy many Real Estate assets in the US. Not a completely foolish move in my book, but fairly close - neither mortgage assets nor the US$ have been fully re-priced yet, so they are investing too early. But then again, what do I know ... )
[Quote from http://economictimes.indiatimes.com/News/International__Business/Dubais_Istithmar_eyes_subprime_hit_US_firms/articleshow/2613602.cms ]
Commentary for the Week:
The letters edition is coming up soon and I have not received too many that I would like to print. Thus, I am going to write something that should elicit some response. This story is actually nearing classic status, and I have just adapted it for our use (I will try and find the exact reference over the holidays so email me if you would like me to share it with you). I will also leave you with a couple of questions that you can think about over the holidays. The Newsletter will return early in the New Year ...
The Baker, Carpenter, Farmer and the washed-up Manufacturer of Money.
John, Jacob and Jaffer are three energetic friends who frequently decide to take upon challenging adventures. They have bungi-jumped from the Peace Bridge, been hot-air ballooning in Kenya and even been canoeing in the Arctic. In short, they are an excitable, enthusiastic bunch that tend to think better in isolation, but accomplish more together. For their latest escapade, they decide to take a trip around the Bermuda triangle on a sailboat.
I think you can all guess what happens next. Disaster strikes at a particularly inopportune moment, and the sailboat catches fire, burning the sail, transponder, the GPS, Radio, Cell-phones, their wallets and leaving the backup engine inoperable. They begin to drift with the ocean currents and Hurricane Bills deposits them on an unnamed, uninhibited island on a broken un-repairable sailboat. The good news is that they find enough fresh water, abundant fruits, vegetables and various animals that are easily domesticated. The uninhabited island, in other words, is a veritable paradise - at least it was until they arrive. Being energetic people, and having need of things such as shelter, sustenance and occupation, they gravitate towards tasks that suit each of them well. Thus, John becomes a carpenter, using various bits of the sailboat to fashion for himself the tools that he needs to cut trees and shape wood. Jacob becomes a cook, excelling at baking cheesecake using all-natural ingredients. Jaffer becomes a farmer, tilling the soil and domesticating animals for transportation, milk production and as beasts of burden.
As the island economy grows to beyond subsistence levels, a barter system develops whereby Jacob makes food for others while they provide him with shelter and produce. John makes buildings for them and provides them with wood while Junaid provides them with animals for transportation and produce. As their welfare increases however, they have more and more trouble keeping track of what they each owe the other. They seem to have everything they need, but no system by which they can keep account. Also, hauling wood everywhere in order to pay for his food is getting on John's usually serene nerves, creating issues for the boys. At one of their meetings over dinner, they discuss inventing money for exchange purposes. There is only one problem though - John being an engineer in his previous life, Jacob being a doctor and Jaffer being a teacher, none of them are quite sure of how to set it up. In the best tradition of democratic governance however, they decide to delay any resolution and settle for the status quo.
A few weeks after that, as John is taking apart the badly beaten sailboat on the beach even more, he notices a small craft being pushed towards the island by the waves. As the craft gets closer, he sees that there is another survivor about to land on their shores. As the craft finally lands, an immaculately dressed, professional-looking man carrying a hefty briefcase alights.
I introduce myself as 'Jawad the Money-Maker' and proceed to ask John about all the possible real estate sites on the island where I can buy a house. John looks at me a bit strangely, perhaps thinking of overcharging me for the property, but being the honest soul that he is, proceeds to explain that there are no prior owners of the land. As he introduces me to the others and I begin to understand their roles in the island economy, I realize that although they are each master of their smaller domains, they all share the resources of island. This is an unfamiliar economic system to me, and I ask them more about how they transact their business. As they explain more about bartering wood for cows and bread for wood and cows for cooked lentils, I realize that they may be meeting their personal needs in a socially optimal way (they hardly fight), but they have their economic system all wrong. I know this because being from Absurdistan, the leading economy of the day, (while they are mere Canadians) I have worked in finance long enough to know what works. I accurately describe the problems they are having lugging around cows and wood and bread in order to get cows, wood and bread from their neighbours and they recognize my genius immediately. I propose that they hire me as consultant in order to design a solution for their problems. In return, I ask that they build me a house, provide me with a horse and feed me. Not being totally clueless, they agree to the house and some food up front, with a cow to be delivered only if my solution works. Being a practical and thoughtful man, I retire to a secluded space while they build me shelter.
Once my gorgeous house overlooking the beach is complete, they ask for my solution to their barter problem. I describe it as follows: As their island economy has grown and each produces more output than he can consume himself, they must trade with each other. In order for trading to fulfill its potential, we must be efficient. As their economy is poised for further growth now that they are experts in their chosen fields, the bottleneck was no longer output, but the method by which their output was exchanged. They had now grown enough to be able to move to more efficient system than barter - into a system based on money and credit. Also, it was quite lucky for them that I was from Absurdistan and that I had some of the premier currency of the day - the AbsurdoDollar - in my possession. As the Absurdistan monetary authorities were saints in human skin, we could all be assured that the AbsurdoDollar was sound and would remain strong. Furthermore, since the boys had all been exceedingly kind, I would let them use my AbsurdoDollars for a nominal interest rate. I would loan each of them $500 in return for a lien on their productive collateral (the carpenter's tools, the baker's oven, and the farmer's land) and charge them only 10% for their use of my funds. To ensure that I was a productive member, I would also agree to keep track of prices and payments as long as they fed me.
Again, not being totally clueless, the boys negotiate me down to 5% simple interest on a loan of $1000 AbsurdoDollars for each. This way, each of them has to repay me $1050 in one year. With my ingenious solution, production of bread, wood and grain increases tremendously. John, Jacob and Jaffer are no longer carrying their production around but are able to move easily with their hands free and their wealth in their pockets. This leaves them with more time to work or research more efficient production methods. The island economy begins to hum - when they want to buy food, they pay Jacob. When they want to buy wood, they pay John. When they want to ride around on cows or eat fruits and veggies, they pay Jaffer. But there may be some trouble in paradise ...
Even though we are all agreed that this is an excellent solution, my questions for you now are as follows:
1. How many years will it take for John, Jacob and Jaffer to pay me back?
2. How much am I guaranteed to make in a year? How much are the boys guaranteed to make?
3. If the boys just have to pay interest at the end of every year and there are no bankruptcy courts, what will happen to all productive assets on the island?
4. How many years before one of them runs out of money? How many years before all of them run out?
A Happy Eid, Hannukah and Merry Christmas to all ... the newsletter will return early next year with some of your responses ...
Finance News:
1. Interesting stats and views on whether women control the Financial Planning process in families ... Why is it that while women control the majority of purchase decisions, they are not as motivated to take control of their overall financial well-being? ... This article is somewhat of a call to action ... http://www.advisor.ca/practice/growing_your_business/article.jsp?content=20071211_154533_316
2. For those that wish to follow-up and read up on the subject of last week's commentary (Tax Efficient Charitable Giving) ... http://www.advisor.ca/news/article.jsp?content=20071212_150006_7468
3. Tax-Tips - Straight from the source ... http://www.cra-arc.gc.ca/newsroom/taxtips/menu-e.html
4. Carbon-Trading comes to Wall Street ... http://www.investmentexecutive.com/client/en/News/DetailNews.asp?id=42328&IdSection=148&cat=148&BImageCI=1
Economic News:
1. Must read story of the week - The title says it all ... 'The End of Cheap Food' ... http://www.economist.com/displayStory.cfm?story_id=10250420&fsrc=nwlgafree
2. Observing the 10th Anniversary of the Asian Financial Crisis, perhaps the single most devastating financial crisis of the last century if you measure according to sheer number of people that were deeply affected (and don't include wars) ... Imagine waking up in the morning and finding out that not only is the interest rate you have to pay on your loans now over 100%, but that your local currency is also worth 1/10th or 1/100th of its value in us$ from yesterday ... (I was working in Singapore in 1997 where the currency depreciated by 20-30% in a matter of days - the change was not as 'mild' in Indonesia, Thailand and Malaysia however) ... http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/Taking_stock_Ten_years_after_the_Asian_financial_crisis_2085
3. Greenspan speaks about the subprime crisis ... amazing how he absolves the Fed and thereby himself of all responsibility ... the column is admirable for the sheer hubris on display ... a bit like a policeman letting a drunk driver go when he could have arrested the fellow and then saying that the subsequent mayhem was an 'accident' waiting to happen ... No negligence, just an accident - something like being struck by lightning ... http://www.reuters.com/article/businessNews/idUSN1258328720071212?feedType=nl&feedName=usmorningdigest&sp=true
4. Central Banks around the world rally to keep the US $ from plummeting by lowering rates ... If the US were a developing country, there would be no easing of credit. The World Bank and IMF would have been sent in for 'Structural Adjustment' ... You and I will have to pay for this latest bailout through higher food and gas prices (see 1 above) ... http://www.reuters.com/article/businessNews/idUSN1262150920071212?feedType=nl&feedName=usdai&sp=true
Islamic and ME Finance:
1. The UK government is thinking very carefully about raising money through a sovereign sukuk - (More commonly known as an 'Islamic' Bond) ... I wonder how Islamic it will be if the funds raised go towards the financing of their various well-known military actions ... http://www.zawya.com/story.cfm/sidZAWYA20071210043618
2. An inspired investment or more Oil money on the way down? ... Dubai entity buys 8.1% of chip-maker AMD, even though AMD has been posting losses for a while ... this buy-in may have merit though ... maybe there is a chip-fabrication plant on the table for Dubai in the near future ... http://www.economist.com/business/displaystory.cfm?story_id=10180738
"We think some of the real estate companies being adversely affected are being penalised by the mortgage market" - David Jackson, the chief executive of the Dubai-government-owned investment agency, Istithmar.
You think ... ?
(It is possible that he was misquoted, but if this is the kind of rigorous, inspired thinking in place at the top of ME Sovereign Funds ... then Oil money is not in good hands. I thought the quote was important because ME companies have begun to buy many Real Estate assets in the US. Not a completely foolish move in my book, but fairly close - neither mortgage assets nor the US$ have been fully re-priced yet, so they are investing too early. But then again, what do I know ... )
[Quote from http://economictimes.indiatimes.com/News/International__Business/Dubais_Istithmar_eyes_subprime_hit_US_firms/articleshow/2613602.cms ]
Commentary for the Week:
The letters edition is coming up soon and I have not received too many that I would like to print. Thus, I am going to write something that should elicit some response. This story is actually nearing classic status, and I have just adapted it for our use (I will try and find the exact reference over the holidays so email me if you would like me to share it with you). I will also leave you with a couple of questions that you can think about over the holidays. The Newsletter will return early in the New Year ...
The Baker, Carpenter, Farmer and the washed-up Manufacturer of Money.
John, Jacob and Jaffer are three energetic friends who frequently decide to take upon challenging adventures. They have bungi-jumped from the Peace Bridge, been hot-air ballooning in Kenya and even been canoeing in the Arctic. In short, they are an excitable, enthusiastic bunch that tend to think better in isolation, but accomplish more together. For their latest escapade, they decide to take a trip around the Bermuda triangle on a sailboat.
I think you can all guess what happens next. Disaster strikes at a particularly inopportune moment, and the sailboat catches fire, burning the sail, transponder, the GPS, Radio, Cell-phones, their wallets and leaving the backup engine inoperable. They begin to drift with the ocean currents and Hurricane Bills deposits them on an unnamed, uninhibited island on a broken un-repairable sailboat. The good news is that they find enough fresh water, abundant fruits, vegetables and various animals that are easily domesticated. The uninhabited island, in other words, is a veritable paradise - at least it was until they arrive. Being energetic people, and having need of things such as shelter, sustenance and occupation, they gravitate towards tasks that suit each of them well. Thus, John becomes a carpenter, using various bits of the sailboat to fashion for himself the tools that he needs to cut trees and shape wood. Jacob becomes a cook, excelling at baking cheesecake using all-natural ingredients. Jaffer becomes a farmer, tilling the soil and domesticating animals for transportation, milk production and as beasts of burden.
As the island economy grows to beyond subsistence levels, a barter system develops whereby Jacob makes food for others while they provide him with shelter and produce. John makes buildings for them and provides them with wood while Junaid provides them with animals for transportation and produce. As their welfare increases however, they have more and more trouble keeping track of what they each owe the other. They seem to have everything they need, but no system by which they can keep account. Also, hauling wood everywhere in order to pay for his food is getting on John's usually serene nerves, creating issues for the boys. At one of their meetings over dinner, they discuss inventing money for exchange purposes. There is only one problem though - John being an engineer in his previous life, Jacob being a doctor and Jaffer being a teacher, none of them are quite sure of how to set it up. In the best tradition of democratic governance however, they decide to delay any resolution and settle for the status quo.
A few weeks after that, as John is taking apart the badly beaten sailboat on the beach even more, he notices a small craft being pushed towards the island by the waves. As the craft gets closer, he sees that there is another survivor about to land on their shores. As the craft finally lands, an immaculately dressed, professional-looking man carrying a hefty briefcase alights.
I introduce myself as 'Jawad the Money-Maker' and proceed to ask John about all the possible real estate sites on the island where I can buy a house. John looks at me a bit strangely, perhaps thinking of overcharging me for the property, but being the honest soul that he is, proceeds to explain that there are no prior owners of the land. As he introduces me to the others and I begin to understand their roles in the island economy, I realize that although they are each master of their smaller domains, they all share the resources of island. This is an unfamiliar economic system to me, and I ask them more about how they transact their business. As they explain more about bartering wood for cows and bread for wood and cows for cooked lentils, I realize that they may be meeting their personal needs in a socially optimal way (they hardly fight), but they have their economic system all wrong. I know this because being from Absurdistan, the leading economy of the day, (while they are mere Canadians) I have worked in finance long enough to know what works. I accurately describe the problems they are having lugging around cows and wood and bread in order to get cows, wood and bread from their neighbours and they recognize my genius immediately. I propose that they hire me as consultant in order to design a solution for their problems. In return, I ask that they build me a house, provide me with a horse and feed me. Not being totally clueless, they agree to the house and some food up front, with a cow to be delivered only if my solution works. Being a practical and thoughtful man, I retire to a secluded space while they build me shelter.
Once my gorgeous house overlooking the beach is complete, they ask for my solution to their barter problem. I describe it as follows: As their island economy has grown and each produces more output than he can consume himself, they must trade with each other. In order for trading to fulfill its potential, we must be efficient. As their economy is poised for further growth now that they are experts in their chosen fields, the bottleneck was no longer output, but the method by which their output was exchanged. They had now grown enough to be able to move to more efficient system than barter - into a system based on money and credit. Also, it was quite lucky for them that I was from Absurdistan and that I had some of the premier currency of the day - the AbsurdoDollar - in my possession. As the Absurdistan monetary authorities were saints in human skin, we could all be assured that the AbsurdoDollar was sound and would remain strong. Furthermore, since the boys had all been exceedingly kind, I would let them use my AbsurdoDollars for a nominal interest rate. I would loan each of them $500 in return for a lien on their productive collateral (the carpenter's tools, the baker's oven, and the farmer's land) and charge them only 10% for their use of my funds. To ensure that I was a productive member, I would also agree to keep track of prices and payments as long as they fed me.
Again, not being totally clueless, the boys negotiate me down to 5% simple interest on a loan of $1000 AbsurdoDollars for each. This way, each of them has to repay me $1050 in one year. With my ingenious solution, production of bread, wood and grain increases tremendously. John, Jacob and Jaffer are no longer carrying their production around but are able to move easily with their hands free and their wealth in their pockets. This leaves them with more time to work or research more efficient production methods. The island economy begins to hum - when they want to buy food, they pay Jacob. When they want to buy wood, they pay John. When they want to ride around on cows or eat fruits and veggies, they pay Jaffer. But there may be some trouble in paradise ...
Even though we are all agreed that this is an excellent solution, my questions for you now are as follows:
1. How many years will it take for John, Jacob and Jaffer to pay me back?
2. How much am I guaranteed to make in a year? How much are the boys guaranteed to make?
3. If the boys just have to pay interest at the end of every year and there are no bankruptcy courts, what will happen to all productive assets on the island?
4. How many years before one of them runs out of money? How many years before all of them run out?
A Happy Eid, Hannukah and Merry Christmas to all ... the newsletter will return early next year with some of your responses ...
Finance News:
1. Interesting stats and views on whether women control the Financial Planning process in families ... Why is it that while women control the majority of purchase decisions, they are not as motivated to take control of their overall financial well-being? ... This article is somewhat of a call to action ... http://www.advisor.ca/practice/growing_your_business/article.jsp?content=20071211_154533_316
2. For those that wish to follow-up and read up on the subject of last week's commentary (Tax Efficient Charitable Giving) ... http://www.advisor.ca/news/article.jsp?content=20071212_150006_7468
3. Tax-Tips - Straight from the source ... http://www.cra-arc.gc.ca/newsroom/taxtips/menu-e.html
4. Carbon-Trading comes to Wall Street ... http://www.investmentexecutive.com/client/en/News/DetailNews.asp?id=42328&IdSection=148&cat=148&BImageCI=1
Economic News:
1. Must read story of the week - The title says it all ... 'The End of Cheap Food' ... http://www.economist.com/displayStory.cfm?story_id=10250420&fsrc=nwlgafree
2. Observing the 10th Anniversary of the Asian Financial Crisis, perhaps the single most devastating financial crisis of the last century if you measure according to sheer number of people that were deeply affected (and don't include wars) ... Imagine waking up in the morning and finding out that not only is the interest rate you have to pay on your loans now over 100%, but that your local currency is also worth 1/10th or 1/100th of its value in us$ from yesterday ... (I was working in Singapore in 1997 where the currency depreciated by 20-30% in a matter of days - the change was not as 'mild' in Indonesia, Thailand and Malaysia however) ... http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/Taking_stock_Ten_years_after_the_Asian_financial_crisis_2085
3. Greenspan speaks about the subprime crisis ... amazing how he absolves the Fed and thereby himself of all responsibility ... the column is admirable for the sheer hubris on display ... a bit like a policeman letting a drunk driver go when he could have arrested the fellow and then saying that the subsequent mayhem was an 'accident' waiting to happen ... No negligence, just an accident - something like being struck by lightning ... http://www.reuters.com/article/businessNews/idUSN1258328720071212?feedType=nl&feedName=usmorningdigest&sp=true
4. Central Banks around the world rally to keep the US $ from plummeting by lowering rates ... If the US were a developing country, there would be no easing of credit. The World Bank and IMF would have been sent in for 'Structural Adjustment' ... You and I will have to pay for this latest bailout through higher food and gas prices (see 1 above) ... http://www.reuters.com/article/businessNews/idUSN1262150920071212?feedType=nl&feedName=usdai&sp=true
Islamic and ME Finance:
1. The UK government is thinking very carefully about raising money through a sovereign sukuk - (More commonly known as an 'Islamic' Bond) ... I wonder how Islamic it will be if the funds raised go towards the financing of their various well-known military actions ... http://www.zawya.com/story.cfm/sidZAWYA20071210043618
2. An inspired investment or more Oil money on the way down? ... Dubai entity buys 8.1% of chip-maker AMD, even though AMD has been posting losses for a while ... this buy-in may have merit though ... maybe there is a chip-fabrication plant on the table for Dubai in the near future ... http://www.economist.com/business/displaystory.cfm?story_id=10180738
Letters Edition #1
Quote of the Week:
'Arguments are to be avoided: they are always vulgar and often convincing.' - Oscar Wilde
Commentary for the Week (Letters of the week edition):
Dear Friends,
Welcome to our first 'Letters Edition' where we publish thoughts and submissions from our subscribers. I trust that you will find it enjoyable. The commentary will be back next week.
Letter No. 1:
Dear Jawad,
Comparing the bank's interest income of $50 from $1,000 with your wife's of the same amount from $100 is not comparing like items:
a) The bank is taking an additional risk on the $900 of loans that it does not have covered by her deposit.
b) Very importantly, the bank is facilitating enterprise, or even mere survival, to 10 borrowers who would otherwise remain incapacitated for lack of those funds.
Item (a) - compensation for risk - must surely also be factored into any determination of cost of capital.
Your Dear Friend,
SK
Letter No. 2:
Salam alaikum,
The problem with your analysis of the banks' profitability from the $100 deposit is that you ignore the countervailing consumer surplus generated by 10 loans instead of one. If your wife loans you the money and makes $50, you are worse off by $45, but presumably still better off in a pareto sense, or else you would not have fixed your car. When the bank makes 10 loans to earn the same $50 owned by your wife, it is presumably making nine other people better off, so overall welfare is increased manifold. Even if the bank makes the same absolute profit as your wife, its share of the increased welfare is much less in a relative sense and the net increase in social welfare is presumably on the order of 10 relative to the one transaction with your wife.
Best wishes,
Mohammad Fadel
Assistant Professor of Law
University of Toronto Faculty of Law
________________________________
My response to Letter No. 1:
Dear SK,
As you show little mercy, I respond thusly:
a. There is no $900 ... there is $1000 that only exists as debt owed to the bank, and there is a $100 deposit. The former does not exist as pre-existing wealth or deposits. The only part that is 'capital' and the bank is on the hook for to the depositor is the $100. Furthermore, if the $100 is in a chequing account, the bank would not even be paying out interest to the depositor. This is actually a very key point - the $1000 is not 'capital', the $100 deposit is. The $1000 exists only as debt owed to the bank, not as somebody's deposit that it has to manage judiciously. Of course, any repayment of the $1000 loaned out and the interest charged is profit. I hope that helps because the key to this whole picture is that the capital risk you speak of is intrinsic to the bank's use of leverage in operations, not a result of the fiduciary management of someone's deposits.
b. This is indeed quite a valid observation - something that has been brought up by another honourable genius such as yourself. He probably beat you to opening the email. Unfortunately, you will have to wait until next week for a response. This point is too important for us not to share with everyone...
Point b is quite similar to Dr. Fadel's and is addressed below:
My response to Letter No. 2:
Although I responded to Dr. Fadel's critique privately already, his astute and wise observations deserve wider readership .
As he states, the efficiency gains from having a lower prevailing interest rate are not insignificant. Indeed, if the only loans available were at 50% interest, much of what passes for commerce in today's economy would come to a halt. My wife's $100, left in her own hands it seems, would make for a poor lubricant to the wheels of Progress.
Where I disagree with the good professor however, is on whether efficiency is our only ultimate goal. One of the central problems or tradeoffs that exists in economic decision-making is whether to devote precious resources towards making gains in efficiency or towards those that enhance economic equality, which is a moral standard (I refer you to the work of the economist Arthur Okun). Whereas Dr. Fadel's critique is informed by the imperatives of efficiency, my argument was made more from the perspective of morality. Lowering the prevailing interest rate from 50% to 5% is a gain in the efficiency of the system, not necessarily its morality. What he also reminds us, of course, is that if we could figure out a way, 0% rates would not just be moral, but be exceedingly efficient as well. Again, I don't believe that either of us fundamentally wrong, just that we are not entirely Right either.
I thank Dr. Fadel for allowing us to learn from his wisdom and expertise. For those of whom that do not know of him yet, he is an active, respected and sharp contributor to debates within Islamic Finance. I am honoured to be guided by him and I look forward to many more exchanges, agreements and disagreements with him in the years to come.
Thank you to all who wrote back with their views. A special thank you to people that asked me to get married to someone that charged less interest - I thought that their concern was very touching. The word of the week is 'Hypothetical'.
Finance News:
1. A very timely story for what we have been discussing here ... if you get a chance to read a book on finance this year, try Satyajit Das' 'Traders, Guns and Money' ... it is both funny and insightful. This interview is a good introduction ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071124.r-takingstock24/BNStory/robColumnsBlogs/?cid=al_gam_nletter_maropen
2. A very interesting development in the mining sector has been the recent proposed buyout of Rio Tinto by BHP Billiton ... I encourage you to try and follow this story because there is something deeper going on ... First, at around $150 Billion, it is not a small buyout. Second, the shareholders refuse to accept $150 Billion because they know that what they have in the ground (minerals) are worth more than the dollars (paper) they are being offered today ... http://www.theglobeandmail.com/servlet/story/LAC.20071203.RBHP03/TPStory?cid=al_gam_globeedge
3. Who watches out for investor interests in Canada? The ROB discusses whether they are doing an adequate job ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071203.wimet1204/BNStory/robNews/home
Economic News:
1. How the Subprime loan mess is related to the credit crunch and how that is related to the US $ ... http://www.atimes.com/atimes/Global_Economy/IK16Dj02.html
2. Think you know the Price of Oil ... I mean the Real Price of Oil ... http://www.atimes.com/atimes/Global_Economy/IK22Dj02.html
3. How the wealth of the world has shifted towards the East, and how the new centres of power are behaving relative to the old ... http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/The_worlds_new_financial_power_brokers_2084
Middle Eastern / Islamic Finance:
1. S&P begins to question legal ownership in some 'Islamic' structures ... http://www.zawya.com/story.cfm/sidZAWYA20071126121542
2. How much is the slide in the US $ hurting OPEC? ... http://www.economist.com/finance/displaystory.cfm?story_id=10191717
Miscellaneous:
1. Ever thought about having solar power? ... Here is some inspiration for you ... http://www.theglobeandmail.com/servlet/story/RTGAM.20071203.wlsolar03/BNStory/lifeMain/home
2. The economist rediscovers that the Middle East has more than Oil ... http://www.economist.com/daily/news/displaystory.cfm?story_id=10235761&fsrc=nwl
'Arguments are to be avoided: they are always vulgar and often convincing.' - Oscar Wilde
Commentary for the Week (Letters of the week edition):
Dear Friends,
Welcome to our first 'Letters Edition' where we publish thoughts and submissions from our subscribers. I trust that you will find it enjoyable. The commentary will be back next week.
Letter No. 1:
Dear Jawad,
Comparing the bank's interest income of $50 from $1,000 with your wife's of the same amount from $100 is not comparing like items:
a) The bank is taking an additional risk on the $900 of loans that it does not have covered by her deposit.
b) Very importantly, the bank is facilitating enterprise, or even mere survival, to 10 borrowers who would otherwise remain incapacitated for lack of those funds.
Item (a) - compensation for risk - must surely also be factored into any determination of cost of capital.
Your Dear Friend,
SK
Letter No. 2:
Salam alaikum,
The problem with your analysis of the banks' profitability from the $100 deposit is that you ignore the countervailing consumer surplus generated by 10 loans instead of one. If your wife loans you the money and makes $50, you are worse off by $45, but presumably still better off in a pareto sense, or else you would not have fixed your car. When the bank makes 10 loans to earn the same $50 owned by your wife, it is presumably making nine other people better off, so overall welfare is increased manifold. Even if the bank makes the same absolute profit as your wife, its share of the increased welfare is much less in a relative sense and the net increase in social welfare is presumably on the order of 10 relative to the one transaction with your wife.
Best wishes,
Mohammad Fadel
Assistant Professor of Law
University of Toronto Faculty of Law
________________________________
My response to Letter No. 1:
Dear SK,
As you show little mercy, I respond thusly:
a. There is no $900 ... there is $1000 that only exists as debt owed to the bank, and there is a $100 deposit. The former does not exist as pre-existing wealth or deposits. The only part that is 'capital' and the bank is on the hook for to the depositor is the $100. Furthermore, if the $100 is in a chequing account, the bank would not even be paying out interest to the depositor. This is actually a very key point - the $1000 is not 'capital', the $100 deposit is. The $1000 exists only as debt owed to the bank, not as somebody's deposit that it has to manage judiciously. Of course, any repayment of the $1000 loaned out and the interest charged is profit. I hope that helps because the key to this whole picture is that the capital risk you speak of is intrinsic to the bank's use of leverage in operations, not a result of the fiduciary management of someone's deposits.
b. This is indeed quite a valid observation - something that has been brought up by another honourable genius such as yourself. He probably beat you to opening the email. Unfortunately, you will have to wait until next week for a response. This point is too important for us not to share with everyone...
Point b is quite similar to Dr. Fadel's and is addressed below:
My response to Letter No. 2:
Although I responded to Dr. Fadel's critique privately already, his astute and wise observations deserve wider readership .
As he states, the efficiency gains from having a lower prevailing interest rate are not insignificant. Indeed, if the only loans available were at 50% interest, much of what passes for commerce in today's economy would come to a halt. My wife's $100, left in her own hands it seems, would make for a poor lubricant to the wheels of Progress.
Where I disagree with the good professor however, is on whether efficiency is our only ultimate goal. One of the central problems or tradeoffs that exists in economic decision-making is whether to devote precious resources towards making gains in efficiency or towards those that enhance economic equality, which is a moral standard (I refer you to the work of the economist Arthur Okun). Whereas Dr. Fadel's critique is informed by the imperatives of efficiency, my argument was made more from the perspective of morality. Lowering the prevailing interest rate from 50% to 5% is a gain in the efficiency of the system, not necessarily its morality. What he also reminds us, of course, is that if we could figure out a way, 0% rates would not just be moral, but be exceedingly efficient as well. Again, I don't believe that either of us fundamentally wrong, just that we are not entirely Right either.
I thank Dr. Fadel for allowing us to learn from his wisdom and expertise. For those of whom that do not know of him yet, he is an active, respected and sharp contributor to debates within Islamic Finance. I am honoured to be guided by him and I look forward to many more exchanges, agreements and disagreements with him in the years to come.
Thank you to all who wrote back with their views. A special thank you to people that asked me to get married to someone that charged less interest - I thought that their concern was very touching. The word of the week is 'Hypothetical'.
Finance News:
1. A very timely story for what we have been discussing here ... if you get a chance to read a book on finance this year, try Satyajit Das' 'Traders, Guns and Money' ... it is both funny and insightful. This interview is a good introduction ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071124.r-takingstock24/BNStory/robColumnsBlogs/?cid=al_gam_nletter_maropen
2. A very interesting development in the mining sector has been the recent proposed buyout of Rio Tinto by BHP Billiton ... I encourage you to try and follow this story because there is something deeper going on ... First, at around $150 Billion, it is not a small buyout. Second, the shareholders refuse to accept $150 Billion because they know that what they have in the ground (minerals) are worth more than the dollars (paper) they are being offered today ... http://www.theglobeandmail.com/servlet/story/LAC.20071203.RBHP03/TPStory?cid=al_gam_globeedge
3. Who watches out for investor interests in Canada? The ROB discusses whether they are doing an adequate job ... http://www.reportonbusiness.com/servlet/story/RTGAM.20071203.wimet1204/BNStory/robNews/home
Economic News:
1. How the Subprime loan mess is related to the credit crunch and how that is related to the US $ ... http://www.atimes.com/atimes/Global_Economy/IK16Dj02.html
2. Think you know the Price of Oil ... I mean the Real Price of Oil ... http://www.atimes.com/atimes/Global_Economy/IK22Dj02.html
3. How the wealth of the world has shifted towards the East, and how the new centres of power are behaving relative to the old ... http://www.mckinseyquarterly.com/Economic_Studies/Productivity_Performance/The_worlds_new_financial_power_brokers_2084
Middle Eastern / Islamic Finance:
1. S&P begins to question legal ownership in some 'Islamic' structures ... http://www.zawya.com/story.cfm/sidZAWYA20071126121542
2. How much is the slide in the US $ hurting OPEC? ... http://www.economist.com/finance/displaystory.cfm?story_id=10191717
Miscellaneous:
1. Ever thought about having solar power? ... Here is some inspiration for you ... http://www.theglobeandmail.com/servlet/story/RTGAM.20071203.wlsolar03/BNStory/lifeMain/home
2. The economist rediscovers that the Middle East has more than Oil ... http://www.economist.com/daily/news/displaystory.cfm?story_id=10235761&fsrc=nwl
Subscribe to:
Posts (Atom)